Definition

The Median Price to Sales (PS) Value is a financial metric used to evaluate a company's stock price relative to its revenue. It is the median value of the PS ratios of a group of comparable companies or within a specific industry, providing a benchmark for assessing whether a stock is overvalued or undervalued.

Formula

PS Ratio = Market Capitalization / Total Sales

How to use the valuation method

To use the Median PS Value for valuation, compare a company's PS ratio to the median PS ratio of its industry or peer group. If the company's PS ratio is below the median, it may be undervalued; if above, it may be overvalued. This method helps investors identify potential investment opportunities by assessing relative value.

Which industries it work best in

The Median PS Value works best in industries where companies have similar business models and revenue structures, such as retail, consumer goods, and technology. It is particularly useful in sectors where earnings may be volatile or negative, making other valuation metrics like PE ratios less reliable.

Which industries it does not apply to and why

The Median PS Value is less applicable in industries with significant variations in profit margins or capital structures, such as banking, insurance, and utilities. In these sectors, revenue alone may not provide a complete picture of a company's financial health or value, as profitability and asset management are also critical factors.

Summary

The Median Price to Sales Value is a useful tool for evaluating a company's stock price relative to its revenue, particularly in industries with consistent revenue models. It provides a benchmark for determining whether a stock is overvalued or undervalued compared to its peers. However, it is less effective in industries with diverse financial structures, where other metrics may offer a more comprehensive valuation.